Royal mail privatisation

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Royal mail privatisation

The privatisation of Royal Mail in 2014 was the most ambitious
privatisation since that of the railways in 1994. The Royal Mail
comprised two main operating divisions – UKPIL (UK Parcels,
International & Letters) and GLS (General Logistics Systems) with UKPIL
generating some 84% of the £6.1bn revenues earned in 2012/13 (Source: Royal
Mail share service). Since the government announced its intention to
privatise back in 2010 opposition from unions and consumer groups had
grown, including the threat of strike action by Communication Workers
Union (CWU).

None of this has dented the government’s enthusiasm for the
floatation which created Royal Mail plc. Privatisation of the Royal Mail
means the end of nearly 500 years of state control. Despite the protests
the general belief is that previous attempts to commercialise and
modernise the Royal Mail at a time of considerable change in the
communications industry, had failed.

The origins of the post office date back to the 16th Century
when Henry V111 encouraged the development of a network of postmasters
across England. This network became available for use by the public in
1635 under the reign of Charles 1st. Stamps were introduced
in 1840, followed by the first letter boxes in 1852. In 2006 it lost its
coveted monopoly of post, and while the attempt to part-privatise the
post office in 2009 failed, the coalition government announced its plans
for a full privatisation in 2010. As part of the sell-off around
150,000 employees will be given 10% of the shares, worth at least £2000
(Source: ITV.com).

A significant argument in favour of privatisation is that Royal Mail
will be free to raise capital to invest in much needed new technology
which will enable it to compete against rivals such as TNT. With the
growth of online shopping (estimated at 10% per year - source: Retail
Research) the newly privatised Royal Mail will be able to compete
more effectively for a share of this growing market.

Indeed,
the business secretary at the time, Vince Cable, believed that full privatisation
was the only
way to make the Royal Mail a sustainable business, pointing to the
already successful privatisation of postal services in
Germany in 1994,
and Austria in 1999.

There are several other theoretical benefits of privatisation. As
well as being able to access capital for investment, and of course
providing much needed funds to the Treasury, efficiency improvements are
also likely to follow, including improved
allocative efficiency as prices will be allowed to correspond to the
marginal cost of service supply. It is also likely that there will be an
increase in productive efficiency, where rationalisation will enable
average costs to fall. Of course, the devil is in the detail, and
exactly how many cost savings will be made is unknown. As it stands,
reducing the 6-day a week delivery service to 5 would seem an obvious
place to start, but this is unlikely given the government’s commitment
to a 6 day service (the Universal Service Agreement) until at
least 2022.

Critics have argued that, like other utilities, the post
office’s infrastructure makes it a
natural monopoly, which means that privatisation could see the
future break-up of the infrastructure, with a loss of
economies of scale and the
possibility of ‘wasteful’ competition. On the latter point, competition
does not necessarily stimulate greater demand, and may simple spread the
existing market around several smaller operators, who may well end up
being less efficient than the state monopoly. Of course, the solution to
this is to separate out the infrastructure (including post boxes, post
offices and collection) from the delivery service – much in the same way
that BT was privatised. It is for this reason that the UK government
did indeed separate the Post Office from Royal Mail in 2012, with the
Post Office network remaining under state control. So while you might
post your letter in a Post Office red post box, it might be delivered at
the other end by a completely different company who is contracted to
work for Royal Mail. How all of this pans out remains to be seen, but
what is clear is that mail is a complex business in which the
application of new technology has its limitations. There is no real
substitute for the postman’s delivery round.

Of course, privatisation and rising prices – at least in the short
run – tend to go hand in hand and, in anticipation of privatisation
Ofcom, the communications regulator, has given the nod that it will
shift to a much lighter touch regulatory regime (Source: FT) which will
enable Royal Mail to price is products and services at the market rate.
Good news for prospective shareholders, and possibly not so bad news for
its 150,000 employees. A more sustainable business does not necessarily
mean wholesale job cuts. If the German experience is anything to go by,
perhaps the single most significant benefit for a privatised Royal Mail
is that it can embrace
globalisation and compete for new contracts outside of the UK.
Deutsche Post, the world’s largest provider of postal services, now
operates in 200 countries and employs nearly half a million workers, and
has grown through mergers and acquisitions, including purchase a 25%
stake in DHL – something only possible following its own privatisation.